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GameChanger
Food Security Bill
Looking beyond the current impact. We focus our analysis on (1) the crowding out
of private players in the grain market, (2) implications on global and local prices, (3) the
issues in creating infrastructure to store and move grain, (4) balancing the fiscal and
(5) the prospect of increased savings in rural India and its impact on urbanization. We
draw on the learning of the intended and unintended long-term consequences of other
government interventions in the agricultural produce and rural wage markets: we
believe all these markets now require significant productivity enhancing reforms.
Crowding out of local private players and distortion in global prices
With government now expected to mop up almost three-fifths of the marketable surplus in wheat
and rice (to say nothing of coarse cereals), we expect the government action to distort prices
across the remaining two-fifths of the market. Only 8% of the world’s production (of 350 mn
tons) of rice is traded internationally and India meets around 10% of this trade via exports. India’s
move to protect its consumers led to a quadrupling of world prices of rice in FY2008. The actual
operation of this scheme can significantly alter global prices.
Sorting inter-state issues and balancing the fiscal
Food Corporation of India (FCI) procures four-fifths of the grains from two grain-bowl states of
India (Punjab and Haryana) and moves them to various states that require the grains to dispense
via the Public Distribution System (PDS). The grains need to travel large distances, adding to the
cost of operation of the FCI and to the price of the grain itself. We believe the fiscal deficits caused
by this and similar ongoing schemes will be unsustainable and the government may be required to
relook at the tax rates (or heads of incomes chargeable to tax) meaningfully with a risk of
significant uptick.
Prospect of increased savings in rural India and its impact on urbanization
This measure can meaningfully add to the savings of rural India residents. Given the no usercharges
based and government financed build-out of hard and soft infrastructure (for example
roads and education respectively), this increased saving will possibly be channelized towards
consumption of higher value items (more sustained focus on proteins and oils, and possibly also
entertainment) to alleviate the misery of life at the very low per-capita incomes that exist in rural
India. We believe this can further reduce the already tardy process of urbanization in India.
Case studies: Increase in incomes – but where is the productivity?
In spite of agriculture becoming more remunerative due to the increased minimum support prices
(see our GameChanger report, The Time Is Ripe), there has hardly been a meaningful jump in
productivity. Besides, the wage increase has been so dramatic due to the MG-NREGA scheme that
it now pays to mechanize instead of hiring agricultural laborers, thereby creating a scenario in
which, given the lack of skill-development, they are increasingly becoming unemployable, except
in manual labor-intensive jobs.
The (supposed) rationale for the move – and the way out
The income disparities in India are so stark that the government of India has clearly intervened in
to spread the economic growth of the past two decades since liberalization by diverting significant
resources from urban India to rural India. Ultimately, increasing prosperity for the masses at large
depends on the ability to create meaningful and sustainable employment opportunities.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
GameChanger
Food Security Bill
Looking beyond the current impact. We focus our analysis on (1) the crowding out
of private players in the grain market, (2) implications on global and local prices, (3) the
issues in creating infrastructure to store and move grain, (4) balancing the fiscal and
(5) the prospect of increased savings in rural India and its impact on urbanization. We
draw on the learning of the intended and unintended long-term consequences of other
government interventions in the agricultural produce and rural wage markets: we
believe all these markets now require significant productivity enhancing reforms.
Crowding out of local private players and distortion in global prices
With government now expected to mop up almost three-fifths of the marketable surplus in wheat
and rice (to say nothing of coarse cereals), we expect the government action to distort prices
across the remaining two-fifths of the market. Only 8% of the world’s production (of 350 mn
tons) of rice is traded internationally and India meets around 10% of this trade via exports. India’s
move to protect its consumers led to a quadrupling of world prices of rice in FY2008. The actual
operation of this scheme can significantly alter global prices.
Sorting inter-state issues and balancing the fiscal
Food Corporation of India (FCI) procures four-fifths of the grains from two grain-bowl states of
India (Punjab and Haryana) and moves them to various states that require the grains to dispense
via the Public Distribution System (PDS). The grains need to travel large distances, adding to the
cost of operation of the FCI and to the price of the grain itself. We believe the fiscal deficits caused
by this and similar ongoing schemes will be unsustainable and the government may be required to
relook at the tax rates (or heads of incomes chargeable to tax) meaningfully with a risk of
significant uptick.
Prospect of increased savings in rural India and its impact on urbanization
This measure can meaningfully add to the savings of rural India residents. Given the no usercharges
based and government financed build-out of hard and soft infrastructure (for example
roads and education respectively), this increased saving will possibly be channelized towards
consumption of higher value items (more sustained focus on proteins and oils, and possibly also
entertainment) to alleviate the misery of life at the very low per-capita incomes that exist in rural
India. We believe this can further reduce the already tardy process of urbanization in India.
Case studies: Increase in incomes – but where is the productivity?
In spite of agriculture becoming more remunerative due to the increased minimum support prices
(see our GameChanger report, The Time Is Ripe), there has hardly been a meaningful jump in
productivity. Besides, the wage increase has been so dramatic due to the MG-NREGA scheme that
it now pays to mechanize instead of hiring agricultural laborers, thereby creating a scenario in
which, given the lack of skill-development, they are increasingly becoming unemployable, except
in manual labor-intensive jobs.
The (supposed) rationale for the move – and the way out
The income disparities in India are so stark that the government of India has clearly intervened in
to spread the economic growth of the past two decades since liberalization by diverting significant
resources from urban India to rural India. Ultimately, increasing prosperity for the masses at large
depends on the ability to create meaningful and sustainable employment opportunities.
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